Commercial Paper

The law of negotiable instruments

UCC Article 3

Types of Negotiable Instruments

• Promissory Note: A promise in writing to pay a sum of money.

• Draft: An order addressed by one person to another, ordering the person to whom it is addressed to pay a sum of money to a third party

Check – Drawee is a bank

Parties

• Note: Two party document– Maker – One who promises to pay– Payee - One to be paid

• DraftDrawer – One giving the order to pay

Drawee - One who is directed to pay

Payee - One to be paid

Negotiability

• In writing• Signed• Payable at fixed or determinable time or on

demand• Payable to order or bearer• Unconditional promise or order• To pay a sum certain• Payable in money

Time for Payment

• On demand:– If stated in Instrument– No time for payment is stated

Acceleration clause is permitted

Postdating does not affect negotiability

Time for Payment

• Determinable future time– “on or before a stated date”– Fixed period after date

Payable to Order or Bearer

• Exception : If a check meets all other requirements of negotiability it will remain negotiable even if the words “order of” or “bearer” are missing

Unconditional

• May make reference to another agreement

• May limit payment to a particular fund or source. (Revised Article 3)

Sum Certain (Fixed amount of Money)

• Minimum amount to be paid to holder must be specified.

• May call for the payment of interest

Negotiation

Order Paper Endorsement and Delivery

Bearer Paper

Delivery alone

Imposter and Fictitious Payee Rules

Fictitious Payee Rule: A forged endorsement is effective for negotiation

when maker/drawer has been induced by dishonest employee to issue note/draft.

•Imposter Rule: Forged payee endorsement when maker/drawer has been induced by imposter to issue note/draft is effective for negotiation.

Types of Endorsements

• Blank– Signature only– Names no endorsee

Instrument becomes bearer paper

Endorser guarantees payment

Blank Indorsement

Jane Doe

Types of Endorsements

• Special– Endorser specifically names the transferee to

whom the instrument is payable.

Only transferee can negotiate instrument further

Instrument is order paper

Payment guaranteed by endorser

Special Indorsement

Pay to the order of

Bill Smith

Jane Doe

Types of Endorsements

• Qualified– Blank endorsement– “Without Recourse added

Endorser does not guarantee payment in event of default

Warranty liability still applies

Qualified Indorsement

Without Recourse

Without Warranty

Jane Doe

Types of Endorsements

Exception: “For Deposit Only / “For Collection”Only bank can become holder

•Restrictive–Attempt to restrict further negotiation

General Rule: Endorsement is Not effective / Once instrument is negotiable no endorsement can prevent further negotiation

Restrictive Indorsement

For Deposit Only

Jane Doe

Holder in Due Course

• Holder: Possession of Instrument with all necessary endorsements.

• Holder in Due Course Must Take Instrument– In good faith

– For value

– Without notice of:• Overdue Defects Dishonor Defenses

• Altered or unauthorized signatures

Holder in Due Course

• Holder in Due Course :

• Takes instrument free of personal defenses

• Subject to universal (real) defenses

Personal Defenses

• Ordinary contract defenses

• Incapacity other than minority and adjudicated incompetents

• Fraud in the inducement

• Unauthorized completion

• Theft, when instrument is bearer paper

Real Defenses

• Fraud in the execution• Forgery• Material Alteration• Incapacity of a minor or adjudicated

incompetent• Illegality or Duress that renders instrument

void• Bankruptcy

Warranty Liability

Bearer Paper : Warranties extend only to immediate transferee

Order paper : Endorser warrants to all subsequent holders

•Implied liability whenever instrument is negotiated for value

Warranties

• All signatures are genuine• Good title (transferor is entitled to enforce

the instrument• Instrument has not been materially altered• Transferee has no knowledge of insolvency

proceedings against any part to instrument• No defense of any party is good against

transferee

Shelter Rule

• One who takes from a Holder in Due Course or traces possession back to a Holder in Due Course takes with the rights of a Holder in Due Course even if they do not qualify as a Holder in Due Course.